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Does Vine's Potential Sale Foretell Twitter's Fate?

By Adam Levy – Nov 19, 2016 at 7:03AM

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Twitter will either shut down or sell Vine. Could the same thing happen to its flagship app?

Image source: Twitter. Copyright Troy Holden (@troy) for Twitter, Inc.

The management team at Twitter (TWTR) once described Vine as a "foundational acquisition."  It bought the company before it even launched a product in 2012 for an estimated $30 million. Four years later, it announced plans to shut down the company. Reports recently surfaced, however, that several interested bidders have offered to buy Vine, but the price is a bit disappointing.

At least some of the offers are for less than $10 million, according to TechCrunch. Overall, Twitter spent $30 million on the acquisition to begin with. It then spent another $50 million on Niche, a related acquisition that Twitter will continue to hold on to, to help monetize the platform. And the whole time it was investing in R&D. Getting $10 million would be a pretty lousy return, but at least it's better than nothing.

More importantly, Vine's collapse in value is indicative of Twitter's management's inability to execute on the potential of its products. A year ago, I wrote about the potential revenue Twitter could unlock from Vine's 200 million monthly viewers. (I was wrong.) Since then, Vine has seen viewership slip, and ad products never materialized. We've already seen the start of similar trends with its flagship platform.

Vine's collapse

Last summer, Vine announced it had 200 million unique monthly viewers, and it was quickly pivoting from a social network to a video entertainment network more like YouTube -- the subsidiary of Google, an Alphabet (GOOG 2.65%) (GOOGL 2.81%) company. Indeed, Vine and YouTube have a lot of similarities -- they're both video-centric, they both have talent that got their start on the platform, and they both allow people easily share content everywhere around the web.

But YouTube has one big difference: It generates billions of dollars in revenue. Last year, the streaming site brought in an estimated $9 billion in gross revenue. Analysts project it could reach $27 billion to $28 billion by 2020.

While it was unlikely Vine was on a trajectory anywhere near YouTube's, it looked like it had a lot of potential value up until recently. On the company's third-quarter earnings call last year, CEO Jack Dorsey told analysts, "We'll be looking to turn both [Vine and Periscope] into businesses."

But by the first quarter, the tone had changed. When asked about monetizing Vine, former COO Adam Bain said, "We actually are monetizing Periscope and Vine by bringing that creative canvas into Twitter." That comment indicated a lack of effort to monetize the products directly.

By the summer of this year, nearly all of Vine's top leaders had left the company. And now it's either going to be shut down or sold off.

Will Twitter suffer a similar fate?

Like Vine, Twitter is full of potential. It has unique and important content that is particularly valuable to people interested in keeping up with live news and events. (See the most recent U.S. presidential election cycle.) Additionally, its social-network graph lends itself to better display ad targeting than practically any of its rivals.

But Twitter has been unable to unlock the value inherent in those differentiating factors. From the user onboarding and retention side it has constantly struggled, recently revealing just how bad the problem is. That means a good portion of its users don't generate enough data for superior targeting.

That shows up on its ad product side, where its ad prices are generally considered too high by many businesses. The trend is finally starting to catch up to Twitter's ad revenue, which increased just 8% last quarter. For the fourth quarter, analysts expect revenue growth of less than 5%. This is a company that grew revenue 48% in the fourth quarter last year.

Despite all of its potential, Twitter's management has a history of not executing. The stock has been punished considerably, trading well below its IPO price of $26 per share. Unless management starts executing -- retaining users, creating new valuable ad products -- it'll be a while before it ever reaches that level again, if ever.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Adam Levy has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and Twitter. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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